The only great British economic success story of recent years

Allister Heath was Editor of City A.M. for six years up until June 2014.

Allister Heath

BRITAIN is, as ever, a country of contradictions. On the one hand, the pound is tumbling as the global markets begin to worry about our future, the budget deficit is increasing – not least because George Osborne got £1.2bn less than expected from the sale of 4G licences – real wages are falling at an accelerating rate and the Bank of England has gone soft on inflation. On the other, the jobs market is continuing to perform remarkably well, confounding all of the sceptics. While it is still very tough for millions, and unemployment remains at horribly elevated levels, more people than ever before are working in the UK, and the quality of the new jobs is improving.

The best way to assess the strength of the labour market, adjusted for part time and full time jobs, is to look at the total number of hours worked in the economy. This reached 947.1m in the September-December 2012 quarter, up by 2.6 per cent over the past year; the rebound since the trough of 904m in June-August 2009 has been spectacular. We are now just 2.2m hours below the boom-time peak of 949.3m hours worked in Jan-March 2008. That is very encouraging news, and reinforces the more mainstream data which reveals that there are now more people in work in the UK than ever before.

There are several major caveats, of course. The first is that the population of working age has expanded substantially over the past five years, with youngsters entering the workforce and more immigrants moving here than emigrants leaving. So while the employment rate for those aged from 16 to 64 was 71.5 per cent, up 1.1 percentage points on a year earlier, and an astonishing 584,000 net extra jobs were added to the economy (with the private sector contributing substantially more than that, easily offsetting public sector cuts of 128,000 in the year to September) the employment rate remains lower that it was at the height of the boom. It hit 73 per cent or even slightly higher several times during the good years.

The difference explains the higher unemployment, the greater number of under-employed workers and the other problems in the labour market. The total number of people on the key out of work benefits has fallen to 4.799m, down from a recent peak of 5.098m but remains higher than the 4.314m trough of November 2007.

The second major caveat is that while the total number of hours is almost back to peak levels, output remains significantly lower. If the data is correct, it confirms that productivity – output per hour worked – is substantially lower than it used to be. With output stagnant, it seems that output per hour worked in the past 12 months alone collapsed by 2.6 per cent. We added over half a million extra workers – but produced no more than before. Some of the UK’s past productivity puzzle makes sense – but no economist on earth can convincingly make the past year’s figures stack up. There is something wrong somewhere.

The final caveat is that real wages are continuing to fall. People are pricing themselves back into work, and companies are substituting labour for capital. Total pay is up 1.4 per cent over the past year; retail prices rose 3.1 per cent, translating into a real cut of 1.7 per cent. Once again, public sector pay is going up in nominal terms – yes, there is meant to be a freeze – at a faster rate than private sector pay, at 2 per cent against just 1.3 per cent. In that respect, though not when it comes to jobs, austerity is being borne more by private workers.

That said, job creation has been the one great British success story of the past few years. Let’s hope it continues.